Confidence intact for plastics and packaging
KUCHING: All players in the plastics and packaging segment saw a rise in revenues during this quarter thanks to higher sales volume, elevated average selling prices (ASPs) in tandem with higher resin costs, and resumption of economic activities, while the bottom-line of most players rose in tandem with revenue.
The team at Hong Leong Investment Bank Bhd (HLIB Research) saw that BP Plastics Holding Bhd (BP Plastics) set of results was spot on, Thong Guan Industries Bhd (Thong Guan) came within, while the other players’ results came below its expectation.
“However, we observe that some players faced margin squeeze, due to higher raw material costs and higher operating costs. This, in turn, has affected their share prices with Thong Guan and SCGM Bhd (SCGM) being the worst hit.”
To recap, resin prices rose due to global logistic disruption and electricity crunch in China while expecting resin prices to soften in the second quarter of 2022.
However, the unexpected Russian-Ukraine war has caused a surge in crude oil prices (feedstock for resins), plus the prolonged supply chain disruption continues to drive resin prices skyrocketing - about 19 to 23 per cent year to date across the board.
Notably, resin prices have exceeded the peak by two to seven per cent compared to March 2021 due to the hurricane and winter storm, causing a temporary halt in petrochemical production back then.
“We envisage resin prices will continue to stay elevated until 1HCY22 due to the abovementioned concerns, and there is also time lag between the crude oil prices and resin prices’ movements.
“Our channel checks reiterate that sharply risen resin prices will pass through the cost-plus mechanism. We now expect resin prices to soften in 3Q22 on the back of new resin capacity continuing to come onstream driven by petrochemical players’ expansion, and excess resin holding-inventory from China due to festive break and recent lockdown.”
For 2022, HLIB Research raised its resin prices assumption from US$1,100 per metric tonne (MT) to US$1,350 per MT due to sustained vigorous demand, marginally below the year to date average of US$1,300 per MT to US$1,600 per MT.
This compares with 2021 average resin prices of US$1,100 to US$1,250 per MT.
“Based on our channel checks, we reiterate that as resin prices rose sharply, plastic players will be able to adjust upwards on ASPs for their products. We continue to expect an increase in/elevated ASPs which will allow plastic players to sustain their margins,” it said.
“Notably, plastic players that use business to business market strategy will find it easier to pass on the cost, while those with business to consumer market strategy may not enjoy similar mechanism to easily adjust their ASPs due to a longer locked-in contract review period.
“In our assumptions, we have factored in yearly increases ranging between five to 10 per cent in ASPs for 2022.”
As for the resumption of economic activities, the plastic players have proven their results sustainable during the latest quarter. HLIB Research anticipate their revenue growth will continue to improve as they ramp up their utilisation rate with an average estimate of 65 to 75 per cent on the downside of labour shortage issue.
“We estimate the labour shortage issue will be able to be resolved in the 2HCY22 as the government has announced the reopening of the nation’s border, which will help plastic players to recruit more workers and enhance their operation.
“Nonetheless, we are careful on plastic players’ margins on the back of higher production costs, mainly raw material and freight costs, and higher operating costs.”